MANU/DE/8665/2007

Equivalent/Neutral Citation: 2007(4)ARBLR84(Delhi), ILR(2007)Supp.(5)Delhi59

IN THE HIGH COURT OF DELHI

OMP No. 341 of 2003
Decided On: 31.08.2007
Indian Oil Corporation Vs. Lloyds Steel Industries Ltd.
Hon'ble Judges/Coram:
A.K. Sikri, J.
Counsels:
For Appellant/Petitioner/plaintiff: Rajiv Dutta, Sr. Adv. Rashi Malhotra an Kirat Singh,
Advs
For Respondents/Defendant: Rajiv Shakdhar, Sr. Adv., Amitabh Marwah and Ashish,
Advs.
Case Note:
Arbitrator - Legality of Award - Present petition filed against Award, holding
that imposition of liquidated damages by petitioner upon respondent was not
justified - Held, Arbitrator was right in holding that purported delay has not
resulted in any loss to petitioner as pipeline had not completed, in absence
whereof, there is no question of suffering any other loss by petitioner and
award on this aspect does not call for any interference - Arbitral tribunal has
awarded interest at rate of 24% per annum upon petitioner till he return
amount of respondent - Interest needs to be reduced to 12% per annum for
entire period - There is no stipulation of grant of interest in contract -
Therefore, it has to be for period after demand is made - Award of interest at
rate of 24% per annum seems to be excessive keeping in view the prevailing
rate of interest and mandate of Supreme Court in the of State of Rajasthan v.
Nav Bharat Construction Co. - Therefore, modify award in so far as grant of
interest is concerned and hold that interest would be payable at rate of 12%
per annum - Petition is partly allowed reducing interest in aforesaid manner
and challenge to award is rejected
JUDGMENT
A.K. Sikri, J.
1. The respondent herein was awarded certain contracts by the petitioner. These works
were executed by the respondent but there was delay in the execution of the contract.
Clause 4.4.0.0. of the General Conditions of Contract provided for liquidated damages
in case of delay in execution. Invoking this clause the petitioner recovered the
maximum liquidated damages as provided, i.e. 10% of the contract value, from the
respondent's last running account bill. The respondent agitated as according to it no
such liquidated damages were payable. The contract provided arbitration clause, which
was invoked by the respondent. The learned arbitrator went into this question and has
rendered his impugned award dated 28.4.2003 holding that the imposition of liquidated
damages by the petitioner was not justified. The present petition is filed by the
petitioner challenging this award. The question, as is clear from the above, is about the
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competence of the petitioner to recover the liquidated damages and scope of this
petition is to consider as to whether the impugned award deciding this question is liable
to be interfered with in exercise of this Court's jurisdiction under Section 34 of the
Arbitration and Conciliation Act, 1996 (for short, the 'Act').
2 . To appreciate the controversy, we may note the facts in some more detail. The
petitioner, Indian Oil Corporation, had awarded to the respondent the contract of
designing, detailed engineering, procurement, supply, fabrication, erection, testing and
commissioning of Petroleum Product Terminal Depots along the Kandla-Bhatinda Pipe
Line (hereinafter referred to as 'KBPL') at Jodhpur. The respondent also participated in
the tender process and was awarded the contract, being the successful tenderer. Three
contracts were executed with the respondent namely:
(i) Main contract for design, detailed engineering, procurement, supply,
fabrication, erection, testing and commissioning of KBPL Depot of IOC at
Jodhput. The key features are as follows:

(ii) First Supplementary Contract for Drinking Water System Contract.

(iii) Second Supplementary Contract for Internal Painting of Tanks Contract

Thus, according to the petitioner, there was delay of 21 months, 131/2 months and 13
months respectively in the execution of the aforesaid three contracts. Clause 4.4.0.0. of
the General Conditions of Contract entitles the petitioner to liquidated damages for
delay at 1% of the total contract value for each week or part thereof, subject to
maximum of 10%. This clause reads as under:
Clause 4.4.0.0: If there is any delay in the final completion of the work at any
job site or specific works in respect of which a separate Progress Schedule has
been established, beyond the date for the final completion of the work or work
aforesaid at the job site as stipulated in the Progress Schedule, the owner shall
(without prejudice to any other right of owner in this behalf) be entitled to
liquidate damages for delay at 1% (one per cent) of the total contract value for
each week or part thereof that the work remains incomplete beyond the
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 scheduled date of final completion for the work, or works, as the case may be,
at the job site, subject to a maximum of 10% (ten per cent) of the total
contract value.
Invoking this clause, maximum amount of 10% of the contract value was recovered by
the petitioner from the last running account bill of the respondent. The total amount is
Rs. 3,53,68,840/-. There is no dispute that the respondent had executed the entire work
covered by the aforesaid contracts to the complete satisfaction of the petitioner herein.
There were no defects in performance of the contract. The respondent had given
performance bank guarantees after the award of the work. These bank guarantees were
also discharged by the petitioner progressively. However, only on the allegation that
there was a delay in execution of the work, liquidated damages were imposed and
recovered.
There is also no dispute that completion of the contract was delayed beyond the
stipulated period. However, according to the respondent delay was attributed to the
petitioner. Its case was that there was an admitted delay in KBPL reaching
Jodhpur/Salawas. Consequently, there was delay in commissioning the
marketing/storage terminal at Jodhpur/Salawas and the petitioner, during the course of
execution of the contract, awarded two supplementary contracts - one pertaining to
drinking water system and other relating to internal painting system of the tanks. These
contracts were executed within 41/2 months and 2 months respectively from the
respective date of Telex of intent. It was also the case of the respondent that in the
course of execution of the main contract there were alterations, modifications,
additions, deletions and also 'hold on' the execution of the contract which resulted in
delay in commencing, and consequent delay in completion of the contract. For this and
other reasons, the respondent did not accept the claim for delay and also stated that in
fact the petitioner had itself extended the period of contract from time to time and,
Therefore, the petitioner had no right to recover the liquidated damages as with the
extension of time it had waived all its claims. It was also the case of the respondent
that in any case as the pipe line had not reached the terminal, there was no loss or
injury on account of the alleged delay in completion of the contract.
3 . The learned arbitrator, in his impugned award, has accepted the plea of the
respondent herein and for this reason opined that imposition of liquidated damages was
unjustified and, Therefore, the arbitral tribunal has directed the petitioner to refund the
amount of liquidated damages from the respondent together with interest @ 18% p.a.
with effect from 1.10.1998 to the date of the award. Future interest @ 18% p.a. till the
date of payment is also awarded.
4. The Award
The impugned award rendered by the learned arbitrator runs into 24 pages. After setting
out the scope of work in the contracts, case of the claimant (the respondent herein) and
that of the petitioner, it records that following issues are framed on the basis of
pleadings between the parties:
1 . Whether time was of the essence of the contract as an operating condition
throughout the execution of the contract?
2 . Whether the delay, if any, in the execution of the project is attributable to
the Claimant or the Respondent?
3 . Whether the imposition of liquidated damages by the Respondent is
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 justified?
4. Whether the Claimant was forced and coerced by the respondent as alleged
in the Statement of Claim, to enter into the two supplementary contracts with
respect to "Drinking Water System" and "Internal Painting" project? If so, to
what effect?
5 . Whether the execution of the aforesaid two Supplementary Contracts was
responsible for the delay, if any, occasioned in the execution of the principal
Contract by the Claimant?
6 . Whether extensions of time by the Respondent and/or Engineers India Ltd.
constitute a waiver of the rights of the Respondent under the Contract?
7 . Whether the Respondent suffered any injury or wrong justifying the
imposition of liquidated damages, and in any event whether the liquidated
damages imposed by the Respondent were reasonable?
8. Whether the Claimant is entitled to interest by reason of the delay, if any, in
clearing the running account bills, and if so, whether the claim to such interest
is covered within the scope of this arbitration?
9 . Whether the Respondent was entitled to retain monies after the completion
of the Contract?
10. Whether the Respondent is obliged to refund the monies retained by it after
completion of the Contract, and whether the Claimant is entitled to refund of
those monies along with interest as claimed by it?
11. To what relief, if any, is the Claimant entitled?
12. Whether the Counter-claim filed by the Respondent is barred by limitation?
1 3 . Whether the Respondent suffered any loss on account of the delay in
execution of the Contract by reason of its own conduct vis-a-vis the Claimant?
14. If it is found that the delay in execution of the Contract is attributable to
the Claimant, whether the losses claimed in the Counter-claim by the
Respondent can be said to have had direct or immediate proximity with such
delay in the contemplation of the parties at the time of entering into the
Contract?
15. To what relief, if any, is the Respondent entitled?
Thereafter, the arbitral tribunal has recorded issue-wise findings.
5. The reading and tenor of these issues would suggest that primarily there were three
aspects of the matter to be looked into by the arbitral tribunal : (a) who was
responsible for the delay; (b) because of extensions given, whether time remained as
the essence of the contract or the time for execution of the contract was set at large
rendering Clause 4.4.0.0., under which damages were imposed, as waived/infructuous;
and (c) any loss suffered by the petitioner because of the alleged delay warranting
invocation of the said clause. The perusal of the issues would indicate that the
petitioner herein had preferred certain counter claims also, which have been rejected by
the learned arbitrator.
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6. RE. : DELAY
The aspect of delay was considered by the arbitral tribunal under Issue No. 2. The
learned arbitrator has held that the delay in execution of the project is attributable
partly to the respondent and partly to the petitioner as both attributed to the
implementation of the contract overshooting the original period of 16 months, which
expired on 2.7.1994. The respondent sought extension of time for completion of
contract on several successive occasions. Engineers India Limited (for short, 'EIL') were
appointed by the petitioner as the Consultants for these contracts. A committee of the
EIL examined the grounds on which the respondent had applied for extensions from
time to time and found that 5 months 13 days delay was beyond the control of the
respondent meaning thereby that it was not attributable to the respondent but to the
petitioner and remaining period covered by the extensions was attributable to the
respondent. The learned arbitrator noted that though the petitioner did not agree with
the aforesaid findings of the committee constituted by EIL, he was of the opinion that
view taken by the EIL committee was correct. Thus, based on the report of the EIL
committee, the arbitral tribunal held that the time occupied in the execution of the
project beyond 2.7.1994 was attributable to the petitioner insofar as the period of 5
months 13 days is concerned, while the respondent was responsible for delay in regard
to the remaining period.
7 . At this stage itself I may point out that Issue Nos. 4 & 5 are decided against the
respondent i.e. the finding recorded is that the respondent was not coerced by the
petitioner to enter into two supplementary contracts and further that execution of these
contracts was not responsible for delay as these contracts are to be treated
independently to the principal contract and there was no material to indicate that
progress in construction of terminal was impeded by the execution of two
supplementary contracts. Therefore, we have to proceed on the basis of findings on
Issue No. 2 as per which delay is attributable partly to the petitioner and partly to the
respondent and further that the respondent is not entitled to plead delay because of the
execution of the two supplementary contracts.
8. This issue as to whether time remained as essence of the contract or not was the real
bone of contention before the learned arbitrator as well as before me. The arbitrator has
held that at the time of entering into the contract, the intention of the parties was that
time should be the essence of the contract, but it did not remain so in view of
successive extensions given by the petitioner and, Therefore, the clause relating to time
being the essence of the contract lost its significance. He did not accept the contention
of the respondent that merely because the contract provided for extension of the period
for completion of work, it was to be inferred that time was not the essence of the
contract. Various judgments cited by the respondent were held to be distinguishable
and not applicable in view of Clause 4.4.2.0. However, as the repeated extensions were
given, he held that time did not remain essence of the contract.
9. The learned arbitrator, thereafter, referred to and discussed various judgments cited
by the respondent in support of the argument that when the contract provides for
extension of period for completion of work, time does not remain the essence of the
contract. These judgments are:
1) Lamprell v. The Guardians of the Poor of the Billericay Union 1893 Exch. 283
2) Hind Constructions Contractors v. State of Maharashtra MANU/SC/0031/1979
: [1979]2SCR1147

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The learned arbitrator found that some of the judgments referred to by the respondents
were not applicable to the facts of the case. He also found that two supplementary
contracts were awarded to the respondent when the original period for completing the
works under the principal contract had already expired, which would indicate that time
did not remain the essence of the contract. Further, even in these two supplementary
contracts, successive extensions of time were granted. He, thus, concluded as under:
7.14 In my opinion, having regard to the context that after 9 May 1994 the
principle that time should be of the essence of the contract had ceased to
operate, the only considerations were that the terminal should be ready as and
when the pipeline reached Jodhpur and the terminal could be put to commercial
use.
10. The learned arbitrator then proceeded to discuss the justification in the action of
the petitioner in recovering liquidated damages. He opined that to attract Clause
4.4.0.0. and impose liquidated damages, it was necessary for the petitioner to establish
that it had suffered loss by reason of delay in completing the construction of the
terminal under the principal contract and in completing the works covered by the two
supplementary contracts. He found that the terminal could not be put to commercial use
before August 1996 as the pipeline had not reached Jodhpur by that time. According to
the learned arbitrator, the purpose for which the construction of terminal was intended
under the principal contract was to implement the KBPL project and, Therefore, the date
on which commercial use of the terminal is possible would be relevant. Since the
terminal at Jodhpur, covered by the contract, had been constructed and commissioned
by 31.3.1996 and it was put to commercial use much beyond that, i.e. in August 1996,
it could not be said that by reason of delay the petitioner had suffered any loss.
I may point out at this stage that while deciding Issue No. 6, the learned arbitrator,
otherwise, held that since on each occasion when the time was extended, there was a
clear stipulation that extension was subject to the petitioner's rights under the contract
and the petitioner had not waived its right to impose damages under Clause 4.4.0.0.
1 1 . In view of the aforesaid findings, the learned arbitrator opined that it was not
permissible for the petitioner to retain the amount and instead the petitioner was
obliged to refund the monies retained by it and, Therefore, the respondent was entitled
to the amount along with interest @ 18% p.a. This finding was recorded while deciding
Issue No. 10.
12. The counter claims of the petitioner herein were held to be within limitation and not
barred while deciding Issue No. 12 in favor of the petitioner. However, these counter
claims were rejected in view of the findings on Issue No. 3, namely, no loss was
suffered by the petitioner on account of delay in execution. He also held, while deciding
Issue No. 14, that the petitioner had not suffered any loss of interest due to the alleged
blockage of funds or loss/return on investment due to delay. Likewise, claim for loss of
expenditure incurred in the management of manpower was also rejected on the ground
that there was no material on record to support the various details mentioned in
Annexure-III(c) to this effect. The petitioner had also made claim for loss of payment
made to the Rajasthan State Electricity Board for electrical consumption, which was also
rejected on the ground that the terminal was complete much before the pipeline reached
Jodhpur.
13. THE CHALLENGE
Mr. Rajiv Dutta, learned senior Counsel appearing for the petitioner, submitted that the
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impugned award of the learned arbitrator was in manifest disregard, violation and in
derogation of Sections 28(1) and 28(3) of the Act inasmuch as the learned arbitrator
has ignored and overlooked the binding contractual terms operating between the
parties. He also submitted that the learned arbitrator has overlooked the substantive
law, viz. Sections 55 and 74 of the Indian Contract Act. The award is, thus, vocative of
the substantive law of the land and is contrary to and vocative of public policy and is,
Therefore, liable to be set aside.
His submission was that neither the 'hold-on activities' nor the variations ordered by the
petitioner had any effect on the validity of the condition of "time being the essence of
the contract" in view of the following specific stipulations contained in the contractual
terms:
Hold on activity
Clause 2.8.0.0. of the General Conditions of Contract (GCC) deals with the
scope and consequence of "suspension of work" as ordered for and on behalf of
the petitioner. Clause 2.8.1.0 of GCC thereof provided that by notice in writing
to the Contractor, work may be suspended at any time for such period as may
be deemed fit and the contractor on receipt of such order shall forthwith
suspend work or such part thereof until he has received notice/written order to
proceed with the suspended work or part thereof.
Clause 2.8.2.0. of GCC mandated that for such suspension, the contractor shall
not be entitled to claim any compensation.
Clause 2.8.3.0. of GCC mandated that unless the suspension is by reason of
default or failure on the part of the contractor himself, if in the opinion of the
contractor such suspension shall necessitate any extension in the time of
completion, the provisions of Clause 4.3.5.0. and related clauses in respect of
the extension of time shall apply.
Variations
Clause 2.4.0.0. of the GCC vested with the Engineer-in-Charge and/or Site
Engineer the power to by written notice at any time prior or in the course of the
execution of the work alter or amend designs, plans, drawings, specifications,
orders and instructions and made it obligatory on the contractor to carry out the
work or related work in accordance with such altered specifications, alterations,
instructions etc. Under Clause 2.5.0.0. of the GCC the petitioner could at any
time before or after the commencement of the work:- (i) alter the scope of the
work by increasing or reducing the jobs required to be done; (ii) add thereto or
omit there from any specific job; or (iii) substitute existing job with other job
or (iv) require the respondent to perform extra work in or about the job site
and that upon receipt of such notice it was incumbent upon the respondent to
execute the job as required within the altered scope.
Clause 2.4.1.1. and Clause 2.5.2.0. of the GCC mandated that if however, the
Contractor felt that alteration of the scope of work necessitates extension of
time, then the same had to be applied for strictly in accordance with the rigors
of Clause 4.3.5.0. which made it incumbent upon the respondent to apply for
extension within 7 days of the occurrence of event that was likely to lead to
delay in completion/commencement of work.

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14. However, submitted the counsel, the respondent never resorted to Clause 4.3.5.0.
of the General Conditions of Contract within the contractual stipulated time. According
to the counsel, in that eventuality Clause 4.3.10.0. of the General Conditions of Contract
would come into play, which enjoins clearly that no assurance, representation, promise
or other statement of any personnel, engineer or representative of the owner in relation
to extension of time for commencement or completion of the work shall be binding on
the owner or shall constitute an extension unless was asked for in terms of Clause
4.3.5.0. of the General Conditions of Contract and if not so asked for in accordance with
the mandate of Clause 4.3.5.0. of the General Conditions of Contract, no such extension
or assurance could be said to militate against the rights of the petitioner under the
contract inter alias the right to impose liquidated damages on account of delay.
He further submitted that each extension was given by extending the time up to a
particular date and, Therefore, extended date also became the essence of the contract.
In support, he referred to the following cases:
1) Pulgaon Cotton Mills v. Gulab Bai >AIR 1953 Nag. 345>
It was held in this case that the very fact that the purchaser asked for an
extension shows that time was of the essence. Where time is of the essence and
is extended the extended date is also of the essence of the contract.
2) Rati Lal M. Parikh v. Dalmia Cement & Paper Marketing Co. Ltd.
MANU/MH/0148/1942 : AIR1943Bom229
It was held that a party to a contract may, at the request of the other, forbear
from insisting upon delivery at the contract time and may allow time to be
extended, without binding himself to do so, or may expressly contract for an
extension of time and that he may claim damages for non-performance at the
extended time.
3) Mahabir Prasad v. Durga Dutta MANU/SC/0047/1961 : [1961]3SCR639
The Supreme Court held that in commercial transactions time was ordinarily of the
essence.
1 5 . Learned Counsel for the petitioner referred to various correspondence and
communications exchanged between the parties, as per which the respondent was put
to notice time and again not to neglect the work and complete the same, but the
respondent failed to heed to those requests. Learned Counsel further submitted that not
only the aforesaid terms of the contract were ignored by the learned arbitrator, but also
the relevant provisions of the Indian Contract Act, in particular Sections 55 & 74 of the
said Act. He submitted that under Section 55 of the Contract Act where time is of the
essence and that condition is breached, albeit the contract becomes 'voidable'. However,
if performance of the contract is accepted at any time other than that agreed and the
acceptance with notice of the right to claim compensation for such delayed
performance, then all rights to claim damages, including liquidated damages, is fully
saved. He further pointed out that while discussing Issue No. 6, the learned arbitrator
himself recorded the finding that right to impose liquidated damages was never waived
by the petitioner.
16. His next submission was that it was not necessary for the petitioner to prove actual
loss as the clause regarding liquidated damages inherits pre-estimated damages and,
Therefore, in view of Section 74 of the Contract Act such damages can still be awarded
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without proving the same. He submitted that Section 74 of the Contract Act categorically
lays down that where a contract is breached and a sum is named in the contract as the
amount to be paid in cash of such a breach, the party complaining of the breach is
entitled, whether or not actual damage or loss is proved to have been caused thereby,
to receive from the party in breach reasonable compensation not exceeding the amount
so named. Sections 73 & 74 of the said Act operate in two separate realms, i.e. one of
un-ascertained and unquantified damages (Section 73) where actual loss and damages
and that too within the reasonable contemplation of the parties and subject to actual
proof operates; and the other of liquidated damages (Section 74) where the liquidated
sum itself is a reasonable and sufficient benchmark of damages and no actual loss or
injury need to be established or proved. For the purposes of determining whether or not
the liquidated amount is claimable, the petitioner was not required to prove any actual
loss or damage. All that the petitioner needed to establish was that, there admittedly
being a time overrun, : (i) it was not claiming a sum in excess of the liquidated
damages amount under the relevant clause; and (ii) at the threshold of the contract, the
liquidated damages was considered to be a reasonable and genuine pre-estimate of the
losses that the petitioner was likely to suffer if the contract was breached.
17. According to the petitioner, Therefore, the reason given by the learned arbitrator
that taking of cognizance of KBPL pipeline not being ready in time was totally irrelevant.
He relied upon the judgment of the Supreme Court in ONGC v. Saw Pipes
MANU/SC/0314/2003 : [2003]3SCR691 and laid particular emphasis on the following
observations therein:
It is apparent from the reasoning recorded by the arbitral tribunal that it failed
to consider Section 73 and 74 of the Indian Contract Act and the ratio laid down
in Fateh Chand's case wherein it is specifically held that jurisdiction of the
Court to award compensation in case of breach of contract is unqualified except
as to maximum stipulated; and compensation has to be reasonable. Under
Section 73, when a contract has been broken the party who suffers by such
breach is entitled to receive compensation for any loss caused to him which the
parties knew when they made the contract to be likely to result from the breach
of it. This section is to be read with Section 74, which deals with penalty
stipulated in the contract, inter alias (relevant for the present case) provides
that when a contract has been broken, if a sum is named in the contract as the
amount to be paid in case of such breach, the party complaining of breach is
entitled, whether or not actual loss is proved to have been caused, thereby to
receive from the party who has broken the contract reasonable compensation
not exceeding the amount so named. Section 74 emphasizes that in the case of
breach of contract, the party complaining of the breach is entitled to receive
reasonable compensation whether or not actual loss is proved to have been
caused by such breach. Therefore, the emphasis is on reasonable
compensation. If the compensation named in the contract is by way of penalty,
consideration would be different and the party is only entitled to reasonable
compensation for the loss suffered. But if the compensation named in the
contract for such breach is genuine pre-estimate of loss which the parties knew
when they made the contract is likely to result from the breach of it, there is no
question of proving such loss or such party is not required to lead evidence to
prove actual loss suffered by him. Burden is on the other party to lead evidence
for proving that no loss is likely to occur by such breach.
He also referred to the judgment of this Court in Haryana Telecom Ltd. v. Union of India
and Anr. 2006 (2) Arb.L.R. 293.
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18. Learned Counsel strongly relied upon the judgment of the Supreme Court in ONGC
(supra) to contend that the award could be interfered with on finding that the arbitrator
had ignored the provisions of the contract or the substantive law. His submission was
that in that case it was held that Sections 24, 28 and 31 prescribe the procedure to be
followed by the arbitral tribunal coupled with its powers. Power and procedure are
synonymous in the present case. By prescribing procedure, the arbitral tribunal is
empowered and is required to decide the dispute in accordance with the provisions of
the Act. The court further held that if the arbitral tribunal has not followed the
mandatory procedure prescribed under the Act or against the terms of the contract, it
would mean that the arbitral tribunal has acted beyond jurisdiction and the award would
be patently illegal, which could be interfered under Section 34 of the Act and be set
aside.
THE REBUTTAL
1 9 . Mr. Rajiv Shakdhar, learned senior Counsel appearing for the respondent per
contra, refuted the aforesaid contentions of the petitioner and sought to justify the
award on the basis of reasoning given by the learned arbitrator. He submitted that the
award was passed by the learned arbitrator returning a finding on several key issues
and not in ignorance of the contractual provisions or statutory provisions and the
objections of the petitioner, Therefore, do not fall within the parameters of Section
34(2)(a)(iv) of the Act as it was not against public policy. He submitted that the learned
arbitrator had dealt with the case on merits and closely scrutinized the evidence on
record with respect to the aspect of delay, time being the essence, attributability and
quantum of damages as well as with respect to interpretation of Clause 4.4.0.0. and,
Therefore, the award cannot be set aside unless it is a case of complete perversity or a
case of no evidence. Re-appreciation of evidence, as held by the Apex Court, is not
permissible. In support, he referred to the judgment in Arosan Enterprises Ltd. v. Union
of India ( MANU/SC/0595/1999 : AIR1999SC3804 .
He insisted that time was not of the essence of the contract even in view of the terms
thereof as the contract by itself does not speak of time being the essence. His alternate
submission was that in any case during the execution of the contract it did not remain
so in view of the following factors:
(a) Hold on activities - The first hold between 19.5.1994 to 29.10.2004. The
second hold between 29.11.1994 to 2.5.1995.
(b) Addition and deletion of work without factoring in time for mobilization and
demobilization. Work amounting to Rs. 1.29 crores was added by work
amounting to Rs. 84 lacs was deleted.
(c) Discharge of unconditional Bank Guarantees both during the execution of
the contract as well as during the arbitration proceedings.
(d) Award of additional work, i.e. execution of contracts pertaining to DWS on
15.12.1994 and IPS on 10.6.1995.
(e) Delay in clearing the running bills submitted by IOCL.
See observations in Smt. Swarnam Ramachandran and Anr. v. Aravacode Chakungal
Jayapalan MANU/SC/0679/2004 : (2004)8SCC689 .
20. He further tried to demonstrate the cause and effect of the aforesaid circumstances

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which led to delay by referring to a pictorial chart at page 91 of vol. 1 of the
compilation filed by the respondent. He also stated that the said chart was submitted
before the learned arbitrator as well. According to the respondent this chart would show
that if the circumstances with regard to hold on activities and delay on account of
various factors as set out there is taken into account, as also, the finding of EIL that 5
months delay is attributable to the petitioner, then the original date of completion
would get shifted from 2.7.1994 to 15.12.1994, at which stage the respondent had
completed 93.44% of the work as against 98% of the work front available. Against the
work front available if 5% of the work which was deleted is adjusted then in December,
1994 the respondent was right on target. It does not stand to reason that the
respondent would delay the execution of the work when approximately 6 to 7% of the
work was remaining and bulk of its payments had been held by the petitioner.
2 1 . He refuted the submission of learned Counsel for the petitioner that with the
extension, time still remained the essence. It was submitted that there was no provision
in the contract for grant of provisional extensions. The petitioner could either agree for
extension or it could reject the request for extension and terminate the contract.
According to him, the principle of 'without prejudice' cannot apply to such like
situations where the petitioner had options for terminating the contract. He submitted
that the principle is best explained by reference to observations in the case of Hyanes v.
Hirst
A party cannot, except in a strict limited class of cases, protect himself against
the legal consequences of his acts by stating that he does them without
prejudice. No one, for instance, would suggest that a person could protect
himself against the liability for a breach of promise of marriage by taking the
precaution of making the offer without prejudice. Nor can a debtor, who gives
notice that he is about to suspend payment of his debts, protect himself against
the consequence flowing from the commission of this act of bankruptcy, by
giving such notice 'without prejudice'. Nor, in my view, could a person, having
a right to sue either in tort or in contract in respect of a claim arising out of the
one transaction, preserve his right to sue in tort after suing in contract, by
prefacing his declaration by the averment that he sued in contract by reason of
a defect in title, or of keeping it alive for the benefit of the other party as well
as his own, cannot, while electing to treat the contract as subsisting and
requiring the vendor to remove the objection and to alter his position to his
detriment in attempting to do so, avoid the consequence flowing from this
exercise of his election by language a man can only elect once, and when once
he has elected he is bound by his election and cannot again avail himself of his
former option, merely because he claimed in the first instance to exercise his
election without prejudice. A man, having eaten his cake, does not still have it,
even though he professed to eat it without prejudice.
2 2 . Learned Counsel for the respondent further submitted that the bogey of pre-
determined damages could not be raised by the petitioner when it failed to show that no
loss or injury was suffered by it on account of the alleged delay. In addition to the
finding arrived at by the learned arbitrator on this aspect, he also emphasised that
commissioning of the terminal being a fundamental aspect of the contract, it could not
be complete nor would the petitioner have issued a completion certificate till it had tried
and tested the functioning of the marketing/storage terminal by pumping product feed
through the pipeline which would only have been possible when the pipeline reached
Jodhpur. Therefore, at the point in time when pipeline reached Jodhpur, the terminal
was complete in all respects and hence, no injury or loss was suffered.
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Liquidated damages are no different from ordinary damages and hence require
adjudication. There was no power in the contract which enabled the petitioner to retain
monies due under the contract prior to adjudication. The principles of Section 74 of the
Contract Act are applicable even to liquidated damages. This is more so, where it is
possible to measure damages in monetary terms. In order to buttress this submission,
he referred to the following judgments:
1) Bhai Panna Singh v. Arjun Singh MANU/PR/0072/1929 : AIR 1929 PC 179
2) Fateh Chand v. Balkishan Das MANU/SC/0258/1963 : [1964]1SCR515
3) Maula Bux v. Union of India MANU/SC/0081/1969 : [1970]1SCR928
4) Union of India v. Raman Iron Foundry MANU/SC/0005/1974 :
[1974]3SCR556
23. Lastly, his submission on this aspect was that reliance of the petitioner on the case
of ONGC v. Saw Pipes (supra) was inappropriate as the said judgment was not
applicable in view of the following distinguishing features:
(i) the clause in ONGC commences with the expression "time and date of
delivery shall be an essence of the contract". This expression does not find
mention in Clause 4.4.0.0.;
(ii) the purported clause for liquidated damages in ONGC's case is different in
language, width and amplitude than Clause 4.4.0.0. found in the present case;
(iii) the ONGC clause clearly states that it is a "genuine pre-estimate of
damages duly agreed by the parties" - these words are missing in Clause
4.4.0.0.;
(iv) the clause in ONGC permits recovery of liquidated damages in case of
delayed supplies from the bills of the contractor. There is no such provision in
Clause 4.4.0.0.;
(v) the ONGC case was decided by the Arbitrator on the ground that ONGC had
failed to discharge its onus with regard to sufferance of injury and loss on
account of delay. See ONGC v. Saw Pipe MANU/SC/0314/2003 :
[2003]3SCR691 , para 34, page 729. In the present case, the Hon'ble Arbitrator
has returned a finding of fact that no injury has been suffered by IOCL and has
not in contrast come to the said conclusion based on the failure to discharge
onus with respect to injury as was the case in the ONGC decision.
CONCLUSION:
24. I have given my utmost consideration to the submission of both the parties in the
light of the documents and material, which was referred to at the time of arguments. My
conclusion is that no case is made out by the petitioner to interfere with the impugned
award on merits except the award of interest, which is granted at the rate of 18% per
annum. My reasons for arriving at this conclusion are the following:
REASONS:
25. As already taken note of above, the learned arbitrator has arrived at the findings
that the delay in execution of the project is attributable to both the parties. The
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petitioner is held responsible for 5 months 13 days delay and for remaining period of
delay, blame has come on the respondent. This aspect of the findings was challenged
by either parties and, Therefore, we proceed on the aforesaid premise of contributory
delay on both the parties to the extent indicated above.
26. The first question, which needs consideration in this conspectus, relates to time
being the essence of the contract or not. There are two facets of this issue on which the
parties had made their submissions, namely,
(a) time was the essence as per the provisions of the contract. Submission of
the respondent before the learned arbitrator as well as before me was that
various clauses of the contract and particularly, the provision relating to
extension would show that time was not intended to be the essence of the
contract. The petitioner disputed this.
(b) if time was the essence of the contract as per the stipulation contained
therein, whether it ceased to be the essence of the contract in view of the
extensions granted by the petitioner.
27. The learned arbitral tribunal has held that though it was essentially intended by the
parties that time should be the essence of the contract, but it did not remain so because
of successive extensions given by the petitioner and the condition that time should be
the essence of the contract lost its validity. According to the arbitral tribunal, while
examining this question, one had to keep in mind the nature of the contract. Learned
arbitrator noted that contract in question was for setting up storage and making
terminal at Jodhpur. The terminals were an essential feature in the pipeline project for
transferring petroleum products from Kandla to Bhatinda. The laying of the pipeline was
to be completed in phases. Therefore, it was necessarily intended that the terminal
should be set-up and ready to connect with the pipeline when the later reached the site
of terminal. The period of 16 months fixed for setting up of the terminal at Jodhpur was
on the premise that the pipeline would reach Jodhpur site by this time. Therefore, delay
in setting up the terminal at Jodhpur could result in execution of the project being
affected beyond Jodhpur. Therefore, setting up of the Jodhpur terminal was part of an
integrated project. The learned arbitrator was, Therefore, of the opinion that following
two aspects were to be kept in mind while determining this issue:
(a) the provisions in the contract for extension of time had to be dealt with
keeping in view the aforesaid nature of contract in question, namely, Jodhpur
terminal was part of an integrated project; and
(b) though contract contains a provision for payment of damages in the event
of delay, Clause 4.4.2.0. provided right of the owner to terminate the contract.
2 8 . The learned arbitrator found that before the expiry of the stipulated period of
contract, EIL had directed the respondent to put certain activities on hold between
9.5.1994 to 29.10.1994 and from 29.11.1994 to 5.1.1995. He was of the view that
these 'holding over' resulted in affecting the time for completion of the entire works
under the contract even though the petitioner had pleaded that the 'hold-over' were of a
minor nature. There were certain variations ordered by the petitioner as well, by way of
additions and deletions, in the original scope of work. Admittedly, when the respondent
had applied for extension, the petitioner had granted successive extensions of time and
the last extension was up to 31.3.1994, before which date the contract was executed.
According to the learned arbitrator, in view of these extensions the condition that time
should be the essence of the contract lost its validity.
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29. I do not agree with the submission made by the learned Counsel for the respondent
that time was not the essence of the contract even in view of the terms thereof. The
learned tribunal has rightly held that period of 16 months to complete the contract was
fixed for setting up terminal at Jodhpur, as it was originally planned that the pipeline
would reach Jodhpur site by this time. Therefore, delay in setting up the terminal at
Jodhpur could result in execution of the project being affected beyond Jodhpur. Fixation
of this period for completion of the work awarded to the respondent herein, namely,
terminal at Jodhpur was intended to be the essence of the contract, though there was
no specific clause in the contract carrying the stipulation that time is the essence of the
contract. However, once we draw the interference that time would be the essence of the
contract from such a nature of the project, the very grant of extensions and the fact that
the construction of pipeline to reach Jodhpur itself was delayed by the petitioner would
lose the character of time being the essence of the contract. The arbitral tribunal seems
to be right in observing that the terminals were an essential feature in the pipeline
project for transferring petroleum products from Kandla to Bhatinda. Mere setting up of
the terminal at Jodhpur by the stipulated period of 16 months was of no consequence
without pipeline reaching Jodhpur site. Reason is simple. The terminal could not be
made operative without such pipelines and even if constructed, it would have been kept
idle. Therefore, in the absence of specific stipulation that time would be the essence of
the contract, the very factor which makes the time as essence of the contract, would
also result in time ceasing to be the essence of the contract when that factor, namely,
pre-condition is not fulfilled .Following observations of the arbitral tribunal in this
behalf, in the impugned award, needs to be quoted:
In my opinion, at the time when the parties entered into the contract it was
intended that time should be of the essence of the contract and the work should
be completed by 2 July 1994. However, the condition that time should be of the
essence of the contract lost its validity from 9 May 1994 in view of the
holdovers and the variations in the scope of work and the other factors
affecting the timely completion of the works in terms of the original intention.
Apparently, there was significant delay in the laying of the pipeline in its
progress towards Jodhpur, and the urgency felt at the time of entering into the
contract and stipulating that it should be completed within sixteen months lost
its importance. It seems to me that what remained within the contemplation of
IOC when directing the holdovers and variations in the scope of the works as
well as in granting successive extensions was that the terminal should be ready
in time to receive the pipeline when it reached Jodhpur, whenever that might
be. I have no doubt that IOC kept in mind the progress of the laying of the
pipeline towards Jodhpur when it considered the several proceedings affecting
the enlargement of time taken either by itself or at the instance of LSI.
30. It is clear from the above that the arbitral tribunal was influenced by the following
factors in reaching this conclusion:
(a) with the direction to keep certain activities on hold and variations in the
scope of work and other factors affecting the timely completion of works, the
original intention that time should remain the essence no longer remained;
(b) the purpose of fixing the time limit of 16 months for completion of terminal
at Jodhpur was that by this time the pipeline would reach Jodhpur. However,
since there was delay in laying of the pipeline in its progress towards Jodhpur,
the urgency of completing the Jodhpur terminal within sixteen months lost its
importance; and
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 (c) the extensions were given keeping in view the fact that the terminal should
be ready in time to receive the pipeline when it reaches Jodhpur and, Therefore,
the petitioner had kept in mind the progress of laying the pipeline in reaching
Jodhpur.
31. Learned Counsel for the petitioner had referred to the clauses relating to 'hold-on
activities' as well as 'variations' on the basis of which it was sought to be contended
that mere suspension of work or variations in the scope of work or specifications etc.
would not have any bearing. I do not agree with this submission. No doubt, as per the
aforesaid clauses, it was permissible for the petitioner to direct "suspension of work" or
"order variations in designs, drawings, specifications etc.". What is to be looked into is
the effect of such directions given by the petitioner and the circumstances under which
these were given. The impugned award shows that the learned arbitrator tribunal has
taken holistic view of the matter. I am of the opinion that such a view was a plausible
and possible view to be taken in the facts and circumstances of this case.
32. In a particular case where extensions are given fixing the extended date, time may
become the essence of the contract. However, overall view is to be taken having regard
to the facts and circumstances of each case. In the instant case, as already pointed out
above, there is no specific provision in the contract that time would be the essence of
the contract. It is inferred from the circumstances and those circumstances did not
remain valid when the contract progressed. Further, there is no provision in the contract
for grant of provisional extension.
33. No doubt, the arbitral tribunal is supposed to decide the case with reference to the
contractual terms and legal position contained in the statutory provisions. However, I
find that the conclusion arrived by the arbitral tribunal is not contrary to the terms of
the contract or the law on the subject. As mentioned above, the view taken by the
learned arbitral tribunal was a plausible one. Even if the ratio of ONGC v. Saw Pipes
(supra) case is stretched to its maximum limits, it was not the intention of the Apex
Court to hold that Court should sit as appellate authorities over the view taken by the
arbitral tribunal in the award; re-appreciate the entire evidence and exercise the powers
of the appellate court. If the contention of the petitioner is accepted, it would amount to
converting this Court into appellate court and exercising the powers which are exercised
by the appellate court under Section 107 read with Order 41 CPC while scrutinizing the
judgment of the trial court. There was no such intention of the legislature to give such
powers to the courts while exercising its jurisdiction under Section 34 of the Arbitration
and Conciliation Act, nor the Supreme Court in ONGC v. Saw Pipes (supra) stretched the
legal position to those limits. In Arosan Enterprises. v. UOI (supra), this aspect is
succinctly dealt with by the Supreme Court in the following words:
38. It is on the basis of this well-settled proposition that the learned Single
Judge came to a conclusion that the findings of the arbitrators in regard to the
extension of delivery period and failure to fix the fresh date has resulted in
breach of the contract on the part of the Government and the same being purely
based on appreciation of the material on record by no stretch of imagination
can it be termed to be an error apparent on the face of the record entitling the
Court to interfere. The arbitrators have, in fact, come to a conclusion on a
closer scrutiny of the evidence in the matter and reappraisal of evidence by the
court is unknown to proceedings under Section 30 of the Arbitration Act.
Reappreciation of evidence is not permissible and as such we are not inclined to
appraise the evidence ourselves save and except what is noticed hereinbefore
pertaining to the issue as time being the essence of the contract. In this
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 context, reference may be made to a decision of this Court in the case of N.
Chellappan v. Secy. Kerala SEB 6. Mathew, J. speaking for the three-Judge
Bench in paras 12 and 13 observed as below:
1 2 . The High Court did not make any pronouncement upon this
question in view of the fact that it remitted the whole case to the
arbitrators for passing a fresh award by its order. We do not think that
there is any substance in the contention of the Board. In the award, the
umpire has referred to the claims under this head and the arguments of
the Board for disallowing the claim and then awarded the amount
without expressly adverting to or deciding the question of limitation.
From the findings of the umpire under this head it is not seen that
these claims were barred by limitation. No mistake of law appears on
the face of the award. The umpire as sole arbitrator was not bound to
give a reasoned award and if in passing the award he makes a mistake
of law or of fact, that is no ground for challenging the validity of the
award. It is only when a proposition of law is stated in the award and
which is the basis of the award, and that is erroneous, can the award
be set aside or remitted on the ground of error of law apparent on the
face of the record:
Where an arbitrator makes a mistake either in law or in fact in
determining the matters referred, but such mistake does not
appear on the face of the award, the award is good
notwithstanding the mistake, and will not be remitted or set
aside. The general rule is that, as the parties choose their own
arbitrator to be the Judge in the disputes between them, they
cannot, when the award is good on its face, object to his
decision, either upon the law or the facts. (See Russell on
Arbitration, 17th Edn., p.322).
13. An error of law on the face of the award means that you can find in
the award or a document actually incorporated thereto, as, for instance,
a note appended by the arbitrator stating the reasons for his judgment,
some legal proposition which is the basis of the award and which you
can they say is erroneous see Lord Dunedin in Champsey Bhara & Co.
v. Jivraj Baloo Spg. & Wvg. Co. Ltd. 7. In Union of India v. Bungo Steel
Furniture (P) Ltd. 8 this Court adopted the proposition laid down by the
Privy Council and applied it. The Court has no jurisdiction to investigate
into the merits of the case and to examine the documentary and oral
evidence on the record for the purpose of finding out, whether or not
the arbitrator has committed an error of law.
39. In any event, the issues raised in the matter on merits relate to default,
time being the essence, quantum of damages these are all issues of fact, and
the arbitrators are within their jurisdiction to decide the issue as they deem it
fit the courts have no right or authority to interdict an award on a factual issue
and it is on this score the appellate court has gone totally wrong and thus
exercised jurisdiction which it did not have. The exercise of jurisdiction is thus
wholly unwarranted and the High Court has thus exceeded its jurisdiction
warranting interference by this Court. As regards issues of fact as noticed above
and the observations made hereinabove obtains support from a judgment of
this Court in the case of Olympus Superstructures (P) Ltd. v. Meena Vijay
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 Khetan.
34. Following observations in U.P. State Electricity Board v. Searsole Chemicals Ltd.
MANU/SC/0118/2001 : [2001]2SCR13 are also need to be reproduced:
4. Before us the extracts of the logbooks have been produced and the reasons
noted therein, for instance, are "tripping, shutdown, grid failure, breakdown".
The respondent wrote to the appellant seeking clarification regarding the
interruption in the power supply and there was no response to such
correspondence at all. Taking this circumstance into consideration and after
going through the documents produced by the parties, it was noticed by the
arbitrators as follows:
The opposite party failed to produce logbooks for the period 6-12-1978
to 3-12-1980 and also admitted vide their letter dated 4-7-1987 that
these logbooks were not traceable. In these circumstances we are of
the opinion that had the opposite party filed the said logbooks it would
have gone against them. The opposite party has not filed the best
evidence available. Besides, the logbooks which the opposite party
produced, did not give any reasons or where reasons were given, they
were untenable.
Shri Ranjit Kumar very strenuously contended that the relevant documents have
been placed before the arbitrators and stated that except in regard to one
station for some period, rest of the documents of the logbooks had been made
available. However, as noticed by us, there were reasons set out in the
logbooks or, as noticed earlier, those reasons, in the opinion of the arbitrators,
were either not relevant or where they were relevant, they were untenable.
Therefore, the view taken by the arbitrators cannot be characterised as not
emanating from the agreement and falls squarely within the excepted part of
the proviso to Clause 1 of the agreement. When the arbitrators have applied
their mind to the pleadings, the evidence adduced before them and the terms of
the contract, we do not think, it is within our scope to reappraise the matter as
if this were an appeal, and it is clear that where two views are possible - in this
case there is no such scope - the view taken by the arbitrators would prevail.
3 5 . In so far as imposition of liquidated damages is concerned, the discussion is
predicated on the issue as to whether any loss is suffered by the petitioner or not.
Learned Counsel for the petitioner does not dispute that the construction of terminal at
Jodhpur was to be treated as integral part of the entire project, i.e. pipeline project for
transferring petroleum products from Kandla to Bhatinda. He also could not dispute that
the pipeline had not reached Jodhpur by the original date stipulated for completion of
terminal at Jodhpur or extended date. It also could not be disputed that terminal at
Jodhpur had been constructed and commissioned by the respondent much before the
pipeline reached Jodhpur. In fact, because of delay in the pipeline reaching Jodhpur
terminal, this terminal was put to commercial use in August, 1996, whereas the terminal
at Jodhpur was commissioned by 31.3.1996. Therefore, because of delay on the part of
the respondent the petitioner had not suffered any loss.
36. The niceties of this aspect are pointed out by the learned arbitrator in the following
words:
9.1. In fact, well before that, the mechanical completion of the terminal had
already been affected in September 1995, after which the decanting process
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 was employed on 6 October 1995. However, the decanting process cannot be
considered as a feature contemplated by the contract in regard to the use of the
terminal. What was contemplated was the laying of the pipeline coming in from
Kandla to Jodhpur, its connection with the terminal, diversion of some of the
product to the terminal depot for distribution to the local region and dispatch of
the remainder through a pipeline from the Jodhpur terminal proceeding
onwards towards Bhatinda. The process of decanting cannot be considered as a
feature of the KBPL project. Inasmuch as the terminal under the principal
contract was effectively completed and commissioned on 31 March 1996 but
IOC did not put it to commercial use until August 1996, no loss can be said to
have been suffered by IOC by reason of the time taken in completing the
principal contract and the two supplementary contracts.
The learned arbitrator, thus, opined that damages could not be claimed unless the loss
was proved and, Therefore, the petitioner was not justified in imposing the liquidated
damages.
37. The aforesaid discussion in the impugned award rendered by the arbitral tribunal
leads us to the mental process of the learned arbitrator and indicates that the learned
arbitrator was primarily governed by the following two considerations because of which
he held that the action of the petitioner in imposing the liquidated damages was illegal
and unjustified:
(a) even if at the time of entering into the contract period of 16 months for
completion, as stipulated therein, was intended to be the essence of the
contract. The period was fixed keeping in view that the terminal at Jodhpur is
ready by the time pipeline reaches the said terminal. Therefore, while granting
the extensions, the petitioner kept in mind that the pipeline had not reached
Jodhpur and, thus, even if the terminal is ready, it could not be put to any use.
Thus, due to delay in reaching the pipeline at Jodhpur, the period of 16 months
stipulated in the contract lost its significance inasmuch as setting up of Jodhpur
terminal was part of an integrated project; and
(b) in any case, due to the delay on the part of the respondent in constructing
and commissioning the terminal, no loss had been suffered by the petitioner as
the terminal could not be put to commercial use before August 1996 and much
before that the respondent had successfully commissioned the terminal.
38. Notwithstanding the above, the petitioner still wants damages to be recovered from
the respondent on the spacious plea that liquidated damages mentioned in the contract
are pre-determined damages and, Therefore, in view of provisions of Section 74 of the
Indian Contract Act, the petitioner was entitled to these damages and it was necessary
for the petitioner to prove these damages. The legal position, as explained by the
Supreme Court in ONGC v. Saw Pipes (supra), which has already explained above, is
not in doubt. However, it is only when there is a loss suffered and once that is proved,
it is not for the arbitrator or the Court to examine the actual extent of the loss suffered
once there is a pre-estimation thereof. Moreover, the compensation, as stipulated in the
contract, has to be reasonable. In a particular case where the defaulting party is able to
demonstrate that delay/default has not resulted in any loss being suffered by the other
party, then that party cannot claim the damages only because in the contract there is a
stipulation regarding liquidated damages. The Supreme Court in ONGC v. Saw Pipes
(supra) referred to its earlier judgment in the case of Fateh Chand (supra) and Maula
Bux (supra).

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39. No doubt, the parties to a contract may agree at the time of contracting that, in the
event of breach, the party in default shall pay a stipulated sum of money to the other.
However, the stipulated sum has to be a genuine pre-estimate of damages likely to flow
from the breach and is termed as 'liquidated damages'. If it is not a genuine pre-
estimate of the loss, but a amount intended to secure performance of the contract, it
may be a penalty. In Fateh Chand (supra), the Supreme Court explained this principle in
the following words:
...Section 74 declares the law as to liability upon breach of contract where
compensation is by agreement of parties predetermined or where there is a
stipulation by way of penalty. But the application of the enactment is not
restricted to cases where the aggrieved party claims relief as a plaintiff. The
section does not confer a special benefit upon any party. It merely declares the
law that notwithstanding any term in the contract for determining the damages
or providing for forfeiture of any property by way of penalty, the Court will
award to the party aggrieved only reasonable compensation not exceeding the
amount named or penalty stipulated.
40. The Court also observed:
The Court has to adjudge in every case reasonable compensation to which the
plaintiff is entitled from the defendant on breach of the contract. Such
compensation has to be ascertained having regard to the conditions existing on
the date of breach.
And later:
The measure of damages in the case of breach of a stipulation by way
of a penalty is by Section 74 reasonable compensation not exceeding
the penalty stipulated for. In assessing damages the Court has, subject
to the limit of the penalty stipulated, jurisdiction to award such
compensation as it deems reasonable having regard to all the
circumstances. Jurisdiction of the Court to award compensation in case
of breach of contract is unqualified except as to the maximum
stipulated; but compensation has to be reasonable, and imposes upon
the Court a duty to award compensation according to settled principles.
41. It is clear from the above that Section 74 does not confer a special benefit upon
any party, like the petitioner in this case. In a particular case where there is a clause of
liquidated damages the Court will award to the party aggrieved only reasonable
compensation which would not exceed an amount of liquidated damages stipulated in
the contract. It would not, however, follow there from that even when no loss is
suffered, the amount stipulated as liquidated damages is to be awarded. Such a clause
would operate when loss is suffered but it may normally be difficult to estimate the
damages and, Therefore, the genesis of providing such a clause is that the damages are
pre-estimated. Thus, discretion of the Court in the matter of reducing the amount of
damages agreed upon is left unqualified by any specific limitation. The guiding principle
is 'reasonable compensation'. In order to see what would be the reasonable
compensation in a given case, the Court can adjudge the said compensation in that
case. For this purpose, as held in Fateh Chand (supra) it is the duty of the Court to
award compensation according to settled principles. Settled principles warrant not to
award a compensation where no loss is suffered, as one cannot compensate a person
who has not suffered any loss or damage. There may be cases where the actual loss or

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damage is incapable of proof; facts may be so complicated that it may be difficult for
the party to prove actual extent of the loss or damage. Section 74 exempts him from
such responsibility and enables him to claim compensation inspire of his failure to
prove the actual extent of the loss or damage, provided the basic requirement for award
of 'compensation', viz. the fact that he has suffered some loss or damage is established.
The proof of this basic requirement is not dispensed with by Section 74. That the party
complaining of breach of contract and claiming compensation is entitled to succeed only
on proof of 'legal injury' having been suffered by him in the sense of some loss or
damage having been sustained on account of such breach, is clear from Sections 73 and
74. Section 74 is only supplementary to Section 73, and it does not make any departure
from the principle behind Section 73 in regard to this matter. Every case of
compensation for breach of contract has to be dealt with on the basis of Section 73. The
words in Section 74 'Whether or not actual damage or loss is proved to have been
caused thereby' have been employed to underscore the departure deliberately made by
Indian legislature from the complicated principles of English Common Law, and also to
emphasize that reasonable compensation can be granted even in a case where extent of
actual loss or damage is incapable of proof or not proved. That is why Section 74
deliberately states that what is to be awarded is reasonable compensation. In a case
when the party complaining of breach of the contract has not suffered legal injury in the
sense of sustaining loss or damage, there is nothing to compensate him for; there is
nothing to recompense, satisfy, or make amends. Therefore, he will not be entitled to
compensation See State of Kerala v. United Shippers and Dredgers Ltd.
MANU/KE/0064/1982 : AIR1982Ker281 . Even in Fateh Chand (supra) the Apex Court
observed in no uncertain terms that when the section says that an aggrieved party is
entitled to compensation whether actual damage is proved to have been caused by the
breach or not, it merely dispenses with the proof of 'actual loss or damage'. It does not
justify the award of compensation whether a legal injury has resulted in consequence of
the breach, because compensation is awarded to make good the loss or damage which
naturally arose in the usual course of things, or which the parties knew when they made
the contract, to be likely to result from the breach. If liquidated damages are awarded
to the petitioner even when the petitioner has not suffered any loss, it would amount to
'unjust enrichment', which cannot be countenanced and has to be eschewed.
42. It is too preposterous on the part of the petitioner to submit that it should get the
liquidated damages stipulated in the contract even when no loss is suffered.
RE.: COUNTER CLAIM OF THE PETITIONER
43. The petitioner has preferred counter claim on account of alleged losses on following
counts:
a) loss of interest due to blockage of funds;
b) loss of interest on investment due to delay in completion of project of KBPL
Top, Salawas (Jodhpur).
c) loss of expenditure incurred in encroachment of man power during delay of
21 months.
d) loss of payment made to Rajasthan State Electricity Board for electricity
consumption.
44. When it is found that the learned arbitrator was right in holding that the purported
delay has not resulted in any loss to the petitioner as the pipeline up to Jodhpur had not
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completed, in the absence whereof, there is no question of suffering any other loss by
the petitioner and award on this aspect does not call for any interference.
45. The learned arbitral tribunal has awarded interest at the rate of 24% per annum
from 1.12.1996 and at the rate of 18% per annum from 1.10.1998. Having regard to the
facts and circumstances of this case and prevailing market rates, which were much
lower to than the aforesaid rates awarded by the tribunal, I am of the view that the
interest needs to be reduced to 12% per annum for the entire period. Though the
respondent would be entitled to interest, as per the respondent itself, demand was
made on 26.11.1997, which was reiterated on 26.12.1997. If we exclude some time
from the date of demand, it would be appropriate that the interest is awarded from
1.1.1998. There is no stipulation of grant of interest in the contract. Therefore, it has to
be for the period after the demand is made in view of the provisions of Section 3 of the
Interest Act. Further, award of interest at the rate of 24% per annum up to 30.9.1998
and at the rate of 18% from 1.10.1998 also seems to be excessive keeping in view the
prevailing rate of interest and the mandate of the Supreme Court in the case of State of
Rajasthan v. Nav Bharat Construction Co. reported as MANU/SC/0747/2001 :
AIR2002SC258 . I, Therefore, modify the award in so far as grant of interest is
concerned and hold that interest would be payable at the rate of 12% per annum with
effect from 1.1.1998 till the payment is made.
46. This petition is partly allowed reducing the interest in the aforesaid manner and
challenge to the award is rejected.
47. No costs.
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